This is an exciting time for Saudi Arabia’s economy because so many companies are going through a process of restructuring to make themselves more efficient.
The benefits of this business revolution will eventually be felt by the entire Kingdom, as the financial reforms result in more jobs and better services.
But the strength and the speed of the changes will depend very much on the successful launch of the proposed Capital Market Authority. The CMA is a bold initiative by the government to empower Saudi Arabia to further develop its stock market as an engine of growth — just as in Tokyo, London and Hong Kong.
The CMA is important because it will provide the framework of rules and regulations that a capital market needs in order to be fair, efficient and open in its dealings.
These values are the foundation stones, which companies need if they are to raise capital to grow their businesses and which investors also need if they are to have the confidence to invest in new enterprises.
The enactment of the Capital Market Law last year and the expected launch later this year of the CMA as a regulator of international quality are very timely. Saudi businesses can only fulfill their ambitious development plans if they can make use of the same sophisticated financial services and instruments that their counterparts use in other major global markets.
This sort of corporate finance structure has never existed in the Kingdom before. It will make possible a major transfer of knowledge to Saudi corporate finance professionals. This transfer of knowledge is a duty, which banks like the HSBC Group take very seriously.
Tasks that were performed offshore will be carried out onshore. All the services provided historically by “suitcase bankers” — flying in, making sales and flying out again — will be provided onshore, and done better.
Of course, thanks to Tadawul, Saudi Arabia already has one of the world’s most technologically advanced stock exchanges. Tadawul provides real-time settlement — something not even available in London or New York. Now, thanks to the CMA, it will have equally comprehensive procedures for matters such as issuing securities and dealing with intermediaries.
The Saudi market will be free to develop exciting capabilities which many businesses do not yet realize exist. For example the CMA will lead to a new lease of life for Islamic finance.
There is already a significant demand for Islamic securitization of assets. The HSBC group have developed Islamic securities in Malaysia, Qatar, UK and many other countries and welcomes the opportunity to be able soon to provide a wider portfolio of Islamic alternatives for Saudi companies seeking to raise funds. What type of businesses can expect to gain from the reforms that will flow from the Capital Market Law? One would be companies seeking advice on, and capital to finance, mergers and consolidations within their respective industries.
Another group of companies to benefit will be those engaged in projects too large to finance through their balance sheets. These will include, for example, companies involved in power and water, petrochemicals, mining, cement or in social infrastructure projects.
Others might be ready to focus more of their efforts on their core business and divest their non-core activities. Others might be family owned companies who need a wider choice of financial instruments to help them achieve transfers of assets between the generations.
A major area of growth is likely to center on IPOs. The number of real IPOs that have taken place in the Kingdom over the past 25 years is surprisingly small.
The capital market is now very liquid and there is a huge demand for opportunities to invest in good quality stocks. But there are just not enough individual stocks to buy — this is the ideal background for an expansion in IPO activity.
This will require new skills from Saudi-based investment banks. Fortunately the major banks have gained much experience in other markets in, for example, organizing broad domestic placing mechanisms. Bringing these skills to benefit Saudi companies who plan IPOs will not be difficult.
Another major development that will be generated by the Capital Market Law will be the development of a thriving corporate debt market. The Kingdom’s businesses will have a wider array of investment instruments to meet their specific requirements. Developments which have been delayed through lack of appropriate means of raising the capital will become possible.
But the most important development of all will be the regulation carried out by the Capital Market Authority. Private investors will benefit greatly from the twin virtues of transparency and protection. Transparency means that they will be able to see exactly what is going on inside companies in which they have invested while protection will mean their money will be safeguarded from intermediaries. One word of warning: Businesses and investors alike must realize that the CMA will not work miracles overnight. It will take time for results to start to flow. Capital markets in other countries have taken decades to develop effective regulatory regimes. Saudi Arabia has done much of the development work already and will have an international-class regulator of its capital market in a much shorter time.
However, we should still think in terms of years rather than months for the main benefits to be felt by the Kingdom as a whole. But it will be worth waiting for and worth encouraging, because the job creation resulting from the CMA’s business revolution will be one of the best developments Saudi Arabia has ever witnessed.
(Timothy Gray S. Gray is Head of Investment Banking for HSBC in Saudi Arabia)
